# 1 – Suppose the marginal social cost of providing health care to a person is given by the equation 2

1 –

Suppose the marginal social cost of providing health care to a person is given by the equation 20+4Q An individualâ€™s marginal benefit of health care is 300-Q This individual has an insurance policy that stipulates that the person will pay 25% coinsurance OOP That is, the recipient of the care will pay 25% of the MSC

a Solve for the optimal level of consumption and price of health care for this society

b Solve for the private market equilibrium level of health care What is the social cost for the last unit at this level? (May not be round numbers)

c Calculate the deadweight loss

d What are the total OOP costs for this individual?

2 –

A corporation produces output with a constant market price of $70 per unit The marginal product of capital is 1/(2K), where K is units of capital, with each unit assumed to be worth $1 The life span of the capital is 10 years, implying the straight line depreciation rate ?=10 The financing cost of capital is ?=10 Also, assume the discount rate to use in any present value calculations is 10

a What is the optimal level of capital for the firm?

b Suppose the corporate tax rate on accounting profits is 40% The firm can include depreciation at the rate ? per year in its accounting costs, but not its financing costs What is the optimal level of capital for the firm?

c For the scenario in b, what is the effective corporate tax rate?

d Same assumptions as b Except, now suppose the government allows the firm to depreciate 25% of its capital costs immediately, while the remainder depreciates at the straight line rate ?, what is the optimal level of capital for the firm?

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